For an industry that has seen a lot of instability over the past six years or so, 2016 will surely be recorded as one of the stormiest 12 months so far. The lower global economic growth forecast of 2.4 per cent for the year, was also a downward revision from an earlier projection of 2.9 per cent. It may not just end with 2016, there is also a lot of uncertainty regarding global trades in 2017.
Bankruptcies and M&A:
Turbulences have been coming from all directions, led by the huge wave of mergers and acquisitions and bankruptcies, including the completion of French Shipping giant CMA CGM’s $3.38 billion buyout of Singapore’s Neptune Orient Lines (NOL), and Swiber Holdings’ liquidation. However, the most shocking event for the industry was surely the full-blown bankruptcy of South Korea’s biggest shipping company, Hanjin Shipping Company.
OPEC’s Production Cut Deal:
On November 30, OPEC announced that it would reduce output by about 1.2 million barrels per day (bpd) by January 2017. This is the first announced output cut by the group in eight years. Saudi Arabia will bear approximately 40 percent of the cuts, with Iraq reducing output by nearly 20 percent. Nigeria and Libya were exempted from the cuts. OPEC also secured agreements from non-OPEC members. Russia led this group of non-OPEC producers by agreeing in principle to cut production by about 300,000 bpd.
Iran’s increase in supply:
Since Iran’s sanctions were eased in January 2016, the country boosted its production by 870,000 barrels a day this year and pumped 3.67 million barrels a day in November. Iran doubled its exports as prices rallied and won approval from OPEC last month to pump even more while other members cut. Moreover, the country has been exporting more crude since April than it did under sanctions, and sales for November 2016 reached about 2.4 million barrels a day. At present, the country is trying to attract more than $100 billion in foreign investment for an industry deprived for years of technology and funds.
Iraq’s uncertainty to cut output:
As part of the November 30th OPEC deal, Iraq had agreed to cut production by 200,000 to 210,000 bpd effective January 1, 2017. However, the country added more uncertainty to the integrity of the OPEC deal by hinting that it would not make cuts to oil production immediately next month as the agreement requires, but those reductions would occur in the first half of 2017. Complicating matter is that unlike Saudi Arabia, Iraq has a significant private sector presence. The Iraqi government will likely have to cut output from state-owned fields rather than order international firms to cut back, which would not only scare away investment but also require compensation.
Libya’s return to oil exports:
Libya reopened two of its biggest oil fields (Sharara and El-Feel) and is set to load its first crude cargo in two years from its largest export terminal, as the country pursues plans to almost double output in 2017. The fields’ reopening will help boost the country’s oil production by 175,000 barrels a day within one month and 270,000 barrels a day within three months. The country is currently producing 600,000 barrels a day, less than half of the 1.6 million it pumped before the 2011 uprising, and is targeting production of 900,000 barrels a day by the end of this year and about 1.1 million barrels in 2017.
US Presidential Election:
Donald Trump’s victory as the next US President surprised the oil market and pressured oil prices initially, but the market bounced back soon after as it recovered from the initial shock. The uncertainty surrounding Trump’s approach to the economy and global trade rattled financial markets. Investors were worried that his policies could destabilize already tepid growth rates, which would cut into oil consumption. Brent crude futures closed at $46.36 per barrel on November 8, down 0.24 percent from their last close. On the very next day, Brent showed an increase of 0.70 percent as the trading hours ended.
Bunker prices have recorded a significant change, with no firm trend whatsoever. We have compared bunker prices of major ports recorded averages of each month to highlight the change in prices this year:
Outlook: A tough 2017
After a successful deal to cut output in late 2016, OPEC is eyeing a crude oil price range of $50-$60 per barrel going forward, which, combined with a higher tax on Russian fuel oil exports in 2017, suggests little downside to wholesale fuel oil costs in the next few months. Therefore, the year 2017 is expected to see some pressure on bunker supplier’s margins.
Moreover, the shipping industry is making slow progress in removing overcapacity in many sectors, and the risk of the new governmental policies in the US is expected to be a risk for global trade. Difficult trading conditions for the shipping industry and, in particular, the continued consolidation within the container shipping markets, means a likely contraction in bunker volumes next year.
In the US, local players see Donald Trump’s recent Presidential election victory as further evidence bunker demand might weaken in 2017. The president-elect is widely expected to reverse President Obama’s decision to reject the Keystone XL pipeline, which in theory would mean decreased dependency on oil from outside of the continent and an associated reduction in tanker traffic.
As the shipping activity winds down with the year coming to an end, things are expected to remain quiet, at least until the Lunar New Year holiday at end-January 2017.
About Ms.Sushmita Rai:
Sushmita has over 6 years of professional work experience across market and business research, commodities and building material domains. She holds a graduate degree in commerce from Mumbai University and is currently pursuing a Masters’ degree in Financial Management. At Sing Fuels Pte Ltd., she works as a Bunker Analyst. She is responsible for educating clients on Bunker market projections through her reports which are prepared after extensive market research.
Sing Fuels Pte Ltd. is engaged in the trading of marine fuel and lubricant services to ship owners and charterers, worldwide. Headquartered in Singapore, Sing Fuels Pte Ltd. operate a global bunkering network through their offices in Asia, Europe and the Middle East to match the bunker quality, quantity, location and pricing requirements of their customers in a timely manner.